MILKEN'S GUILTY PLEA : How Milken Set Up Illegal Trading in Shares of MCA

In the fall of 1984, MCA Inc. was caught in the swirls and eddies of a stock market that sent share prices zooming at the slightest hint of a hostile takeover bid--or dealt them a punishing blow as soon as an apparent threat had passed.

MCA stock had shot up 34% that summer as word circulated that Golden Nugget Inc., a Las Vegas gaming concern, owned just under 5% of the entertainment giant and might be poised for a takeover attempt with backing from Drexel Burnham Lambert.

By late summer, the Las Vegas company and its flamboyant chairman, Stephen Wynn, had decided against the bid.

But how could it unload nearly 2.4 million MCA shares, purchased for about $99 million, without triggering a stock slide and losing a fortune?

On Oct. 4, Wynn bought some time by telling a Wall Street Journal reporter that his company did indeed own the shares and planned to keep them. "For now, I'm sitting and I intend to sit," he said.

As he admitted in pleading guilty to the third of six felony counts on Tuesday, Milken--without advising Golden Nugget of his plans--asked arbitrager Ivan F. Boesky quietly to buy large blocks of MCA shares from the casino company.

The move was designed to conceal the fact that Golden Nugget was pulling out of MCA.

Boesky eventually resold the shares in the market and lost some money as MCA's price drifted down slightly--but Milken secretly promised that Drexel would make up the losses.

The maneuver, as Milken has now admitted, violated anti-fraud and other provisions in the federal securities law, because his make-good promise wasn't recorded on Drexel's books and allowed a favored ally, Golden Nugget, to dispose of stock at an artificially high price.

"I wanted the shares to hit the market in a way that would not identify our client as the seller and adversely affect the price that it might receive. . . . (My) promise was not recorded on Drexel's books nor made public, and it was wrong not to do so," Milken said Tuesday in his statement to the court.

"It was clearly a market manipulation," Prof. Richard Jennings, a securities expert at the UC Berkeley law school, said of the transaction, as described by both Milken and federal prosecutors.

But Jennings said it was highly unlikely that MCA or any shareholder could successfully press a claim to have been damaged by the transaction.

"So far as civil liability, you've had other suits involving Boesky, (convicted insider trader) Marty Siegel and others. Of the suits under (SEC anti-fraud provisions), all have been unsuccessful," said Jennings.

In Jennings' view, the statute of limitations--generally three to five years in such cases--as well as the difficulty of proving specific damages, would be extremely difficult hurdles for anyone to overcome in pressing a suit against Milken.